External debt

External debt burden fallen dramatically and savings on external debt servicing have freed resources for poverty reduction. Continued efforts needed to sustain long-term debt sustainability.

Key commitments

Africa: At Monterrey (2002), Africa committed to establish national comprehensive strategies to monitor and manage external liabilities, embedded in the domestic preconditions for debt sustainability.

Development partners: The Monterrey Consensus called for a speedy, effective and full implementation of the enhanced Heavily Indebted Poor Countries (HIPC) initiative and increased international cooperation for sustainable debt financing.

In 2005 at Gleneagles, G8 countries further committed, through the Multilateral Debt Relief Initiative (MDRI), to cancel 100% of outstanding debts of eligible HIPCs to the International Monetary Fund (IMF), the International Development Agency (IDA) and the African Development Fund (AfDF), and to provide additional resources to ensure that the financing capacity of the above institutions is not reduced.

Recognising significant improvement in key debt sustainability indicators, the 2008 Doha Financing for Development Conference stressed the need to avoid a recurrence of unsustainable levels of debt. And the G-8/Africa Joint Declaration adopted at the G-8 Deauville Summit in May 2011 reiterated the call to preserve debt sustainability in Africa. The G-20 Cannes Summit Declaration called for the review of the World Bank/IMF Debt Sustainability Framework to allow greater private participation in African Infrastructure.

What has been done to deliver on these commitments?

Africa: Debt management systems in most African countries have progressed, albeit only marginally. Most countries have now set up a debt management unit, debt recording systems are generally adequate, and data on public debt is more readily available. In most countries, the legal framework for public borrowing is better defined, and there are nascent efforts to co-ordinate debt management and macroeconomic policies across key government agencies.

Development partners: The HIPC and MDRI Initiatives have made substantial progress. To help countries avoid lawsuits by creditors who do not participate in the HIPC process, the World Bank and other donors have helped countries buy back commercial debt at a steep discount, thus clearing debt not covered by the HIPC Initiative. The World Bank and the IMF have developed a Debt Sustainability Framework (DSF), periodically reviewed since its establishment in 2005, to regularly assess the debt sustainability of eligible countries based on debt burden indicators. To allow countries with new borrowing space to finance public investment, partly on non-concessional terms, the DSF was recently revised by strengthening the link between debt-financed investment and growth, capturing better the expected economic and social returns from investments.
Under the Evian approach, development partners have also taken action to deal with debt problems of non-HIPC African countries, including partial write-offs. In order to improve debt management, the OECD and South Africa have set up the first African Sovereign Debt Management Centre, which helps governments in the region to analyse debt and sovereign risk, as well as monitor bond market developments.

What results have been achieved?

Of the 33 eligible African countries, 26 have reached the HIPC completion point and have received irrevocable debt relief and 100% debt cancellation under the MDRI.  Four others are expected to reach completion point within the next 12 months. Three ‘pre-decision point’ countries that are yet to start the process of qualifying for debt relief under the Initiative are potentially eligible, and one more country could become eligible,  making a total of 34 countries in sub-Saharan Africa benefiting from the Initiative. Over US$10 billion of external commercial debt has also been written off in 21 low-income countries of which 15 from Africa, since the creation of the Debt Reduction Facility by the World Bank in 1989.

The total debt relief effort for all HIPCs amounted to US$109.8 billion (net present value) at the end of 2011, US$76 billion under the HIPC initiative and US$33.8 billion under the MDRI. Multilateral agencies and Paris Club creditors bear the largest shares of the total cost of the HIPC Initiative.

Sub-Saharan Africa’s external debt burden, measured both in relation to gross national income and exports, has declined dramatically as a direct result of these initiatives. As a share of export earnings, debt service payments have fallen sharply, from an average of about 11.5% in 2000 to less than 3.3% in 2010. The slight deterioration in debt indicators in 2009, caused by lower growth and weak exports following the global financial crisis, has bounced back in 2010. Sharp reductions in debt service payments have provided more fiscal space for poverty reduction, and particularly for health, education and other social services.

Nevertheless, several challenges remain:

• Some of the remaining seven countries that have not yet reached the HIPC completion point, and particularly the pre-decision-point HIPCs, will require sustained domestic efforts and continued support from the international community in the interim period;
• Full participation of all creditors, particularly a number of smaller multilateral, non-Paris Club bilateral and private creditors, remains to be secured;
• The global financial crisis has had a significant impact on debt vulnerabilities of African countries which experienced a worsening of debt ratios in 2009.  While this has proven to be a transitory phenomenon, 5 of the 27 African countries that have benefited from HIPC and MDRI debt relief are again experiencing a high risk of debt distress, calling for continued support to help these countries achieve sustainable debt management.

What are the future priority actions?

Africa:

• Maintain efforts to enhance debt management and sustainability, including domestic debt;
• For the remaining 7 pre-HIPC completion countries, sustain efforts to reach completion.
 
Development partners
• Provide more technical assistance to strengthen public debt management capacities in African countries;
• Continue efforts to ensure that eligible countries get full debt relief from all their creditors and discourage lawsuits against HIPCs by non-Paris Club creditors;
• Maximise the concessionality of new funding and prioritise grants over loans to avoid a return to unsustainable debt levels.